A Guide to REITs for the Curious Investor

A Guide to REITs for the Curious Investor

REITs Can Be An Excellent Investment in a Diversified Portfolio
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Real estate investment trusts (REITs) are companies that hold a portfolio of real estate properties. Most REITs manage the properties they own. REITs can be an excellent investment in a diversified portfolio, offering an income stream higher than many other types of investments. Interested in REIT investing? Here’s a guide.

What REITs Are

It’s important to note that, while REITs own real estate, they do not own them with an eye to reselling or developing property. REITs are focused on managing income-producing properties. They purchase and hold properties with an eye to their income potential.

Most REITs specialize in a type of real estate. The types include commercial (retail spaces and malls), residential (apartment complexes), healthcare (hospitals) and industrial (warehouses and storage space).

REITs as an Investment

Publicly traded REITs offer several significant advantages to investors.

First, they have a high dividend yield. REITs are required by law to pay out at least 90 percent of their income stream to investors. Many pay out more, up to 100 percent. As a result, investors in REITs can enjoy dividend payouts above what they would find in other types of investments. Over the past two decades, REITs have returned an average of nearly 12 percent to investors. The Standard & Poor’s 500, a broad index of stocks, has returned an average of over 8 percent.

Second, publicly traded REITs offer transparency. They are traded on stock exchanges, just as stocks are. As a result, their financial reporting requirements are public and can be easily accessed by investors. Buying physical real estate individually as an investment requires significant research into the condition of the property and real estate conditions that can affect the investment. With REITs, that research is performed by the REIT and made public.

Third, because publicly traded REITs are traded on stock exchanges, they are convenient both to purchase and to sell. They can be bought and sold just as stocks can be. Buying physical real estate is a lengthy process, requiring mortgage applications and financial disclosure for the investor. Buying shares in a REIT can be nearly immediate — as fast as the purchase takes to complete.

Similarly, if an investor ever wants to sell shares of a REIT, it can be done immediately. Physical real estate is not a liquid investment for those who purchase the properties. It can take a long period of time to sell property, and showing it to potential buyers takes time and effort. REITs are liquid.

Non-Traded REITs

Investors should know that non-traded REITs are a category. They operate as public REITs do, but are not traded on public stock exchanges. Investors need to go through a broker who specializes in non-traded REITs.

Investment Considerations

Taxes

REITs come with the same investment considerations that other stocks do regarding taxes. investors should remember that dividends are taxed, and be prepared to pay the tax annually.

In addition, REITs can appreciate in price in addition to the dividend, just as stocks do. If the REIT price rises, it may declare a capital gain. If so, investors will need to pay the capital gains tax.

Market Conditions

They also come with some of the same investment considerations as real estate. Real estate conditions can vary. Real estate markets can be hot, with very low vacancy rates. These allow REITs to charge optimum prices for the real estate they hold and manage. But, of course, real estate markets can also be poor, with high vacancy rates. If this occurs, prices will be low. Or, real estate markets can be average, with good but not spectacular prices.

Market conditions depend on the economy and the direction of interest rates, to some degree. A strong economy generally will lead to a strong real estate market, as company profits allow them to expand. A weak or softening economy will eventually cause real estate markets to decline, because companies retrench.

Lower interest rates make mortgages more favorable for companies. They can buy more property with the money they have. As a result, lower interest rates often cause companies to expand as well. Rising interest rates make mortgages more expensive. A climate of climbing rates can make companies reluctant to expand. It can also delay existing plans if ground has not been broken.

REIT investors should keep careful watch on economic conditions in the areas REITs are invested in. They should also keep up with the direction of interest rates. If either of these changes in a way that could affect the price of the real estate the REITs hold, investors may want to consider selling the REIT.

Portfolio Diversification

Diversification means holding different types of asset classes in one’s portfolio: stocks, bonds, real estate and cash. The advantage of diversification is that it allows investors to benefit from the upside of their chosen investments, but it protects against the downside risk of having all the portfolio eggs in one basket. If the stock market falls, for example, diversified investors can still benefit from real estate, bonds and cash. If bonds tank, diversified investors will still have stocks, real estate and cash.

While REITs can be a great investment, real estate values go both up and down. If profits go up, all is well if you’ve chosen a well-managed REIT. But if profits fall, REIT dividends may be 90 percent of a smaller pie, so they will fall as well. Many investment advisers recommend holding no more than 5 percent to 10 percent of a portfolio in REITs, so if real estate markets are adversely affected, your portfolio is protected.

REITs hold and manage commercial real estate property. They can be great investments because they offer high dividends, transparency, convenience of buying and selling and liquidity. Investors interested in REITs should research the real estate market in which they operate and keep up with economic conditions and the direction of interest rates.

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I'm The Girl Without A 'Friend Group'

And here's why I'm OK with it

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Little things remind me all the time.

For example, I'll be sitting in the lounge with the people on my floor, just talking about how everyone's days went. Someone will turn to someone else and ask something along the lines of, "When are we going to so-and-so's place tonight?" Sometimes it'll even be, "Are you ready to go to so-and-so's place now? Okay, we'll see you later, Taylor!"

It's little things like that, little things that remind me I don't have a "friend group." And it's been like that forever. I don't have the same people to keep me company 24 hours of the day, the same people to do absolutely everything with, and the same people to cling to like glue. I don't have a whole cast of characters to entertain me and care for me and support me. Sometimes, especially when it feels obvious to me, not having a "friend group" makes me feel like a waste of space. If I don't have more friends than I can count, what's the point in trying to make friends at all?

I can tell you that there is a point. As a matter of fact, just because I don't have a close-knit clique doesn't mean I don't have any friends. The friends I have come from all different walks of life, some are from my town back home and some are from across the country. I've known some of my friends for years, and others I've only known for a few months. It doesn't really matter where they come from, though. What matters is that the friends I have all entertain me, care for me, and support me. Just because I'm not in that "friend group" with all of them together doesn't mean that we can't be friends to each other.

Still, I hate avoiding sticking myself in a box, and I'm not afraid to seek out friendships. I've noticed that a lot of the people I see who consider themselves to be in a "friend group" don't really venture outside the pack very often. I've never had a pack to venture outside of, so I don't mind reaching out to new people whenever.

I'm not going to lie, when I hear people talking about all the fun they're going to have with their "friend group" over the weekend, part of me wishes I could be included in something like that. I do sometimes want to have the personality type that allows me to mesh perfectly into a clique. I couldn't tell you what it is about me, but there is some part of me that just happens to function better one-on-one with people.

I hated it all my life up until very recently, and that's because I've finally learned that not having a "friend group" is never going to be the same as not having friends.

SEE ALSO: To The Girls Who Float Between Friend Groups

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11 Financial Tips For College Grads Who Don't Know Where To Start

Most people learn how to navigate their finances as they go, at the cost of making several mistakes and starting good habits later than they should've. Don't be like most people!

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Adulting is hard, especially when it comes to money. If you're like me and you took a personal finance class in high school or college, you probably don't remember much because the information wasn't relevant to you at the time. Well, now you're almost done with college and you're ready to be welcomed into the real world as a freshly-minted adult. Suddenly you realize that class was probably one of the most important classes you ever could've taken.

Here are 11 tips to start making money moves today.

1. Start building your credit

It may not seem important now, but it's a good idea to start building your credit early. In three to five years or so, when you're ready to apply for a car or home loan, you're going to want to be approved to get the best interest rates, and that means having a credit score of at least 760. See tips two and three for more on how to increase your credit score.

2. Open a credit card if you don't have one already

One huge factor in your credit score is how long your oldest credit card account has been open, so you want to make sure to start early. A first card many people get is called a "secured" credit card, which basically acts like a debit card so the bank knows you won't go all "Shopaholic" and max it out. Make sure to pay every single one of your monthly payments on time and in full. No excuses, no exceptions.

3. Make all of your student loan payments on time and in full

JUST DO IT.

4. Embrace the concept of paying yourself first

Paying yourself first is a concept that many millionaires, even billionaires, swear by. Decide how much of your income you want to save. Then set up a portion of your paycheck to deposit directly into your savings before you can even think about it. The rest can go to your checking account for spending on bills, food, rent, and other expenses.

5. Build a three- to six-month emergency fund

Did you know that 33% of Americans would struggle to pay $1,000 in an emergency? This is a serious issue. You don't want to ever experience living "paycheck to paycheck," let alone have a minor crisis throw your life upside down. That's why you're going to build this emergency fund before you do anything else with your money. Think of this fund as something that you can't touch until you absolutely need it. If and when that time comes, you'll know, and you'll be so grateful that you were smart and were prepared.

6. Open a Roth IRA

There are so many things to be said about Roth IRAs and why you should get one as a new college graduate. In short, IRA stands for Individual Retirement Account. A Roth IRA is unique because any money you put into it is taxed now, so you won't have to pay taxes on it when you're retired and ready to use it. The main benefit: you also won't have to pay any taxes on the money you earn in the account. In addition, because you're young, you get to take advantage of the power of compound interest for a long time before you retire. This could potentially earn you hundreds of thousands of dollars. The best time to open a Roth IRA was yesterday. So go do it now!

7. Contribute as much as possible to your 401k

A 401k is basically an investment bank account that you can't use until you retire, and it will be taxed once you start using it (so it is not taxed now). Many employers offer 401k matching, and they open one up for you when you start your first job. If your employer offers 100% matching up to 6% of your salary, that means that if you can afford to put 6% of your income into your 401k, your employer will also contribute the exact same amount. Listen to me: this is free money. I like free money. You like free money. Take it.

8. Open a high-yield savings account

This is 2019. Don't keep your money in cash or in a regular savings account, where it'll depreciate 2-3% in value every single year it sits there. Get yourself a high-yield savings account, in which interest rates are anywhere between 2.0 and 2.25%, and watch your money make money while you sleep.

9. Start tracking your spending

Since it has become much easier to make quick and painless purchases these days, you should definitely be aware of your spending. I personally like to use a free app, like Mint, that does all the work for you because it puts all of your financial accounts (ie. savings and checking accounts, investments, loans, assets, etc.) into one place.

10. Create a monthly budget for each of your spending categories

These include food, housing, transportation, entertainment, subscriptions, health and wellness, and maybe more. You should know the things you always buy on a monthly basis and how much they typically cost. Comparing your budget to what you really spent after a month will show you exactly where your weaknesses are. Try to stay at or under your budget for each category every month unless there's an unusual event, like a vacation or a car repair.

11. Learn the basics of investing

Compared to the other tips on this list, this is one you can put on the back-burner for a bit. However, that doesn't make it any less important. It's critical for everyone who is financially independent to understand the basics of stocks, bonds, Exchange-Traded Funds, Mutual Funds, REITs, and more that you can use to diversify your portfolio, including in your new Roth IRA and 401k!

What are you waiting for? Up your financial game!

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